The Country Garden Factor In Forest City Revitalisation Plan

Forest City is a US100bn project. Country Garden supposedly holds a 60% stake with the rest by Esplanade Danga 88 (held by Johor state interest and the Sultan of Johor. CG missed two coupon payments totaling US22.5m last month.

- Resale prices have plummeted. Units were launched and sold in 2020 for around RM1,200psf. The resale market is being done at around RM500-550psf currently.

- The venture envisages accommodating 700000 residents in waterfront apartment towers on four man-made islands spanning 30 sq km (11.6 square miles) between Malaysia and Singapore. Only 9,000 people live in Forest City despite having 28000 residential units completed thus far.

- The concept and execution looked good on paper. CG with a top-rate brand, and many Chinese would like to somehow "transfer out" their wealth and exposure overseas - thus making Forest City an easy sale. That has been thrown out the window with the sharp downturn in China's own property market. Beijing, in order to stop public funds from going offshore (capital controls), has literally made it impossible for most Chinese to buy overseas' properties. CG is stalled and the buying from China has too.

- The pandemic only exacerbated the situation. Forest City was initially approved at the state level (where most land use decisions are made) even as the project skirted national environmental regulations. Eventually, the project developer was forced to address both national and even international concerns over the project. Local stakeholders, including coastal residents, fishermen, and environmentalists, played an important role in drawing media attention to the project. Singapore also voiced its objections, and knowing Singapore is a key player in the equation, a lot of work has been spent rectifying the concerns.

- If CG undergoes liquidation, no amount of incentives will be able to lift Forest City - it will have to undergo a long process of verification and tabulation. Residents would have to undergo an administrative process to submit proof to liquidators that they are indeed the rightful owners. CG would have to realize all its assets including shares it holds with its subsidiary companies in Malaysia, and that will include the developer of the Danga Bay project – Country Garden Danga Bay. If Country Garden Danga Bay is liquidated, residents who do not already own their strata titles might be forced to show proof that they are indeed the owner of the unit.

That's the gist of it, on the negative side.

Present Times

At present, CG has two main developments in south Johor – the US$100 billion (RM465 billion) Forest City flagship mega-development and the popular Country Garden Danga Bay on reclaimed land that has a gross development value of US$18 billion (RM83.7 billion). The developer also has a third project in Johor Baru called Central Park, which is still under development. The project is scheduled to be completed by next year and is valued at US$990 million (RM4.6 billion).

Bank Negara said that banks incorporated in the country had limited exposure to Country Garden, and added that the company’s Malaysia unit was servicing loans promptly. Bank Negara Malaysia told Reuters in an e-mail: “The current development with Country Garden Holdings Ltd in China is not expected to pose any material impact on the overall property market activity and prices in Malaysia.”

Interesting Points To Consider

a) Forest City is the largest international property venture for CG. They will try to shutter everything else before they touch Forest City. If Forest City is stopped by CG, that can only mean that the company is going under liquidation.

b) The ECRL (East Coast Rail Link) is considered part of China's Belt & Road initiative (thus making it a more important factor than usual). While the KL-Johor HSR is not exactly part of that initiative, it is also considered vitally important in terms of linking right down to Singapore.

c) Not to mention the numerous projects that China has a vested interest in in Malaysia, Malaysia is a crucial political ally in making sense of the sea rights in the South China Sea. Thus making Forest City not only a CG problem but one with greater ramifications to both countries.

d) The governments of Johor and Singapore are also discussing the possibility of launching further ferry services and will study the sustainability of a prospective new route between Puteri Harbour and Tuas. Unlike the already congested Johor Bahru city center or the area surrounding the causeway, the Second Link area has lots of land banks as well as well-developed infrastructure and facilities. Furthermore, it is close to a large seaport, the Port of Tanjung Pelepas, and the intended Kuala Lumpur-Singapore High-Speed Rail (HSR) station may be relocated to Gerbang Nusajaya (as it was previously planned).

In Closing: CG is a very important factor in trying to revitalize and complete Forest City. Our government can do all the tax reductions and easy access plans, but if CG folds, it will add another 10 years of being in the wilderness for the project.

Hence, the newsflow on CG is of utmost importance. Their viability and the timing of the recovery in China's property market need to be closely followed. 

Following the recent issue of CG not paying the USD22.5m coupon on a couple of bonds, the world was watching to see if the creditors would grant an extension. This was critical in buying time to wait for the recent Beijing measures to pump up buying in the property market to come to fruition.

The X Factor: Country Garden had delayed a deadline for creditors to vote on whether to postpone payments for an onshore 3.9 billion yuan (USD537 million) private bond last Friday at 1400 GMT, as it strives to avoid default. On Saturday, Country Garden won approval from its creditors to extend the payments to 2026, a major relief for the developer and the entire sector.

While Country Garden's liabilities are only 59% of those at Evergrande, it has 3,103 projects across China, compared with around 800 for Evergrande - making the company matter to systemic stability while also fueling contagion fears as it shows signs of financial stress. The contagion effect means Beijing would pull out all stops to ensure CG not only survives but thrives. For now, the Chinese authorities are scrambling to introduce a string of measures, including mortgage rate cuts and an easing of home purchase restrictions, to revive the property market and prop up the sputtering economy.

How Bad

Country Garden's total liabilities were about USD194 billion. It faces 108.7 billion yuan (USD14.9 billion) worth of debts due within 12 months, while its cash levels are around 101.1 billion yuan.

I strongly expect Beijing to come in with a huge injection of capital to CG very soon. Go to liquidation? Silly... what happens when they start to auction off the landbanks of CG - the ramifications are too dire. Imagine the banking loans writedowns, the domino effect on other property players, the polarising disgruntlement among the property owners with loans facing negative equity, the land auctions which will bring down sentiment and land holding asset values even further ...

Hence, overall I see an 80% chance of Beijing coming in to save the company. Judging by the USD14bn loans due within 12 months, it is likely a Beijing-led rescue will come before the year is over for I cannot see them being able to convince another group of creditors to delay/extend the loans. This is a good thing for all the property counters presently rallying around the new measures for Forest City. The related parties just have to get out the details and execute ASAP (Federal, MOF, EPA, Johor state government, Singapore government, visas, MNCs actually moving, implementation details on tax rates, HSR, ferry, etc.)

Do you have any idea how big the rally will be (for Forest City linked counters)  IF/WHEN Country Garden gets the capital injection rescue???

Property Rally - Something Bigger Or Just A Wet Fuse?

The local stocks have been in the doldrums for the longest time. We are talking of at least 4-5 years with the exception of a big run on glove stocks during the pandemic. The market is huge and it takes a lot of factors to collide for it to mushroom into a full-blooded bull market.

Malaysia has one of the highest GDP/market capitalization of stock exchange companies in the WORLD. Please wrap that around your finger. We are talking of 80 odd percent of local GDP. Every time a company starts to make RM4-6m a year, investment bankers will start shadowing those companies and groom them for a listing. The only companies not listed in Malaysia are your laundromats, kedai runcits, cendol seller, etc...

PM Anwar and his team have inherited a poor economy with loads of issues. At the same time, we are battered by the flight of money away from local shores owing to the presence of a new government. Plenty of "gray wealth" has left the shores thus exacerbating the ringgit's strength.

PM Anwar and Rafizi know too well how they need to supercharge the economy while taking time to curtail past misdeeds on our balance sheet. PM announced that Forest City has been designated as a special financial zone to spur the economy in Iskandar Malaysia. Amongst the incentives that have been announced include multiple entry visas, fast-track entry for those working in Singapore, and a flat income tax rate of 15% for knowledge workers. He said this should spur the growth of those involved in the healthcare, education, and tourism sectors.

Now, that announcement was in the middle of August... have a look at UEMS chart:

(UEMS 30 sen to 70 sen rally is about +130%; as the leader and th one with the biggest landbank the rally is still early)

Our superboy has been picking up steam since the middle of July from 30 sen, and it's around 70 sen in less than 1.5 months. OK forget about the fact that someone, somewhere... will also hear about the news first. Where do we go from here? Can this be big and sustainable enough to spark a broader bull run? Or will it just fizzle out?

My Views

a) The announcement by the government is not a haphazard thing; it is a thought-out plan with eventualities mapped out on logistics, people movement issues, visa issues, the proper monitoring and regulatory side on Forest City, etc.

b) This is certainly big enough to trigger a broader market rally; the concept... remember Putrajaya in 1995... that was a concept ... in 2001 it is real, viable, and operating; the same here, Forest City is not a concept, while it has not been fully built out yet, there are sufficient developed parcels to jump-start the whole new concept.

c) Political will: The Federal is for it, they need something big to revive the economy and hope to stand a better chance of winning the next general elections; We all know the Johor state government has been waiting for a long time to kickstart this mega project; and Singapore is exactly at the property cycle whereby, it needs to move the industrial sites to cheaper locales, to the Singapore side, this is the best alternative for them but they CANNOT be seen as the one proposing the scheme as that might be construed as a "takeover or buyout"; this way its more accommodating, you scratch my back I scratch yours.

The Johor Bahru-Singapore Rapid Transit System (RTS) is not a new project. It started in 2020 and will only be completed in 2026. While MyHSR Corporation recently initiated a request for information (RFI) to solicit concept proposals from local and international players for the behemoth Kuala Lumpur-Singapore high-speed rail project, the bankability of any public infrastructure project of this scale is always in question, however, with this new development, the "success factor" for this will be bettered substantially. 

d) As explained earlier, our local economy is intrinsically tied to our stock market; what it means is that it has a very high BETA, i.e. you pump RM100m into the stocks, it will have a velocity of money of around 7x-9x to the real economy; making it imperative to jumpstart the local economy; thus the Federal will move mountains to ensure that this gets delivered and executed promptly and smartly.

(IOI Prop's rally from 1.10 to 1.60 is about a 45% gain; that's a lagging performance and should have the legs to test RM2.00 soon)

The above table is a useful guide but I would also consider real float /controlling shareholders' real interest/ funding capacity/ stale bulls on the way up.

What's Next

Now, we need subsequent REAL CATALYSTS, and they need to come every few weeks. The newsflow will have to be positive and consistent.

Catalyst #1: This one has to happen soon. Since PM Anwar's announcement, I have been scouring the pages of The Straits Times to read any news or opinions from the government down south. The silence was deafening. Seriously, nothing of substance, just the announcement, nothing from the related ministries or PM down south. This just makes it more LIKE and PALPABLE that some major announcement will come soon. That's because obviously, it looks like a huge collective PR and rhetoric will come soon to applaud how the plan will enhance every facet of Singapore's economy and future prosperity.

Catalyst #2: There has to be REAL DEMAND, the real movement of companies. That should come from MNCs and some Singapore GLCs to start with, followed by local Singapore companies. Once timelines is heard and seen, these catalysts will further enhance the rally in stocks.

Catalyst #3: To restart many of the projects, they will need funds. Foreign companies coming to JV will be big catalysts as well. Fundraising will take center stage, thus providing more climaxes for the local bourse.

Catalyst #4: Asian stocks have been a blur over the past few years. The Forest City is a sufficiently big enough idea to draw back foreign investors. Keep an eye on the level of foreign buyers in local stocks over the coming months.

Catalyst #5: Any positive announcement on the Johor-Singapore rapid transit system, in particular on the funding side, JV partners, and timeline.

(stuff like this ... in today's The EDGE CEO)

Catalyst #6: Any positive developments from Country Garden; as they have been defaulting their bonds, the designation of Forest City is a glimmer of hope; at least CG may be keen to complete the whole project, failing which the rest of the project can now at least be sold to other parties to complete (owing to its attractiveness). Any positive news concerning the above will be well regarded.

Final View: Yes, I think this has a solid chance to propel a big rally in local stocks.

Let's look at the LINKED stocks:

(Sunway's run from 1.60 to 1.90 is only a gain of 18%, judging from the factors above 2.50 should not be difficult)

(Somebody forgot to inform them, that it ran up only 9% from 1.40 to 1.52; looks to have some legs yet)

(by virtue of them being a small taikor in Johor; access to mid-priced projects; delivering very solid profits; and having substantial landbank in and around Johor; this has lots of legs; just the run from 85 sen to 1.11, a 30% gain is insufficient to account for just the spectacular profits, and we are not even talking of their Johor exposure)

(up 53% from 60 sen to 92 sen; think there are better counters to ride the coattails)

Disclaimer: This is not a call to buy or sell, just an opinion from a market watcher, please consult your dealer or remisier before any action.